Miguel Leite FollowCo-founder and CEO of Coinvision. +8 years experience in tech and blockchain startups. In crypto for the tech.

14: Introduction to Masternodes

February 8, 2019 3 min read

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Besides trading and investments in ICOs there are other forms of creating wealth in the crypto market that might be more fitting for an investor with less time on its hands. These fall in the category of “passive income”. By now, you surely heard about mining cryptos as a form of passive income in this ecosystem. Surely someone mentioned how expensive a mining rig can be (north of USD$10 thousand at a point) and how much electricity it consumes while providing insufficient rewards.

In the last year or so, mining farms have turned the mining of major currencies into a strangely centralized and high-roller game, where rewards have become uninteresting for individual users running the software on a laptop. However, other options exist. Recently, hosting masternodes (MN) to support blockchain networks has become a popular and more profitable way to make a passive income and be involved in the crypto world, normally without a major initial investment.

What are Masternodes?

Masternodes are full node wallets (desktop wallets that run the whole blockchain) with a higher level of functionality. They are capable of supporting instant transaction records, off-chain anonymization or decentralized governance, amongst other services, depending on the coin or project in case.

Lack of incentive and technical barriers have caused a decline in the number of full node wallets on the different networks. This poses several risks as it makes the network more centralized and vulnerable to attacks. In that sense MNs represent a refreshing solution to this problem, as they incentivize the community to support the network and its services by rewarding users with tokens.

In a sense, hosting masternodes is the safer and smarter type of crypto investment you can make, if your day job does not allow you to be a successful day trader.

How do they work?

For MNs to function, the host must lock away a certain amount of tokens in a watchable wallet. This serves the purpose of assuring the Bona Fide of the hosts as the capital could be lost if a malicious attempt is made against the network. It also prevents excessive centralization of MNs, which could endanger the network.

Each project demands a different number of tokens. There are several projects for which users can host MNs for, like Dash ($DASH), ChainCoin ($CHC), Stratis ($STRAT) or PIVX ($PIVX), to name just a few, all with different particularities. As it starts operating, the network yields tokens as a reward for the services performed by the node. Dash MNs yield $DASH, PIVX MNs yield $PIVX, and so on.

How much do they cost?

While normally much less expensive as setting up a mining rig, MN hosting entails some investment. First, the host will have to acquire the necessary coins on an exchange to run the MN. Here the cost varies considerably. ChainCoin for instance, requires 1,000 tokens for the MN to operate, which right now is worth a bit north of USD$84. Some can cost as little as USD$20, some can cost several hundred thousand dollars, all with varying levels of return on investment, which you can check here.

Also, setting up a masternode on your laptop can be a bit tricky and you might have to brush off on your tech skills. Otherwise, you can opt for hosting your MN in a Virtual Private Server (VPS), which will set you back about USD$60 per year. Vultr is one of the most popular ones but there are many others to choose from.

This is a particularly convenient solution as MNs need to be online 24 hours per day to receive the rewards.

Which coin to choose?

If Dash was the first project to function with Masternode system in 2014, many more have emerged since. This means that after deciding that you want to host an MN, you will have to choose which network to support.

How to do this? Well, the first issue to consider is return on investment (ROI) and entry cost. Some projects have return rates in the thousands, meaning you can pay your investment in just a few weeks, however be sure to check that the coin has enough trade volume for you to be able to sell your coins, otherwise you will end up with a mountain of coins that you can’t move. Once you pick one, or two, go on to the project’s website. Check their white paper and road map, check out what people are saying on social media and internet forums like bitcointalk, make sure the project, and its community, are active. In sum, do your own research.

Make sure you pay close attention to the economics of the coin, what is the maximum supply and how much impact do the masternode rewards have on the value of the coin. A system that constantly produces token rewards with an extremely high maximum supply but doesn’t gather investor attention will eventually simply dilute the value of each token, with the end value being potentially zero.

If you are satisfied with the cost/ROI ratio and feel confident about the project you are supporting, you are good to go. Follow the project’s guide to set up the node and you can sleep better knowing that with every passing hour you are cashing in on your investment.